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Student Loan Consolidation vs. Refinancing: The Quick and Easy Guide

Student Loan Consolidation vs. Refinancing: The Quick and Easy Guide

Juggling multiple student loans from different lenders and loan servicers can be complicated to manage — especially if each one has a different payment deadline, interest rate, and loan term. But there are ways to make the process a bit easier, and potentially even save you money over time.

If you’ve been looking into student loan consolidation vs. refinancing, here’s everything you need to know to make sure you’re making the right decision.

Student loan refinancing vs consolidation: What’s the difference?

When you’re looking for ways to simplify your student loan repayment process, you’ll come across two main options: refinancing and consolidation. While there are some similarities between the two, they’re not interchangeable.

What is student loan consolidation?

Federal Direct Consolidation Loans are loans from the U.S. Department of Education that bundle eligible federal loans into one simple monthly payment with a repayment term of up to 30 years. You can consolidate most federal loans including PLUS loans from the Federal Family Education Loan program. However, you can only consolidate federal loans — not private ones.

If you decide to consolidate, your new interest rate will be calculated based on a weighted average of the current interest rates of your existing loans. So, there’s a chance you may end up paying a slightly higher interest rate after consolidating, even though everything will be all lumped together.

Normally, you only pay interest on the principal of your loan, which is the amount you’ve borrowed minus the payments you’ve made thus far. Interest on loans doesn’t build on itself the way it does when you leave money in the bank.

However, it’s important to note that any outstanding interest on your loans will be capitalized as principal when you consolidate, which means it will be considered part of what you’ve borrowed and you’ll start accruing interest on that amount once you consolidate.

What is student loan refinancing?

Student loan refinancing is when you take out a new loan from a private lender to pay off your existing loans, generally for a lower interest rate1. You then pay the new lender back under new terms.

After refinancing your loans, you’ll end up with one single monthly payment, instead of having to pay your loans individually as you may have previously done if you had multiple lenders.

When you refinance, you may have the opportunity to qualify for a lower interest rate based on your creditworthiness. While most students and recent graduates don’t have an easy time qualifying for loans on their own as they haven’t yet had time to develop a strong credit history, refinancing offers you the opportunity to try for a lower rate after you’ve had some time to build up your credit score (a minimum score of 650 is required to qualify for Earnest loans).

Is it better to refinance or consolidate my student loans?

If you have federal loans, you may be wondering whether it’s better to consolidate them even if you’re separately refinancing private loans. Here’s what you need to know if you’re considering both options.

The biggest advantage of refinancing student loans: Better rates

When you refinance your loans through a private lender, you have the opportunity to get a lower interest rate. Consolidation loans, however, are always the same: Regardless of your credit score or how interest rates may have risen or fallen since you first took out the loans, your rate will always be an average of the rates of your current loans.

If you have a high credit score (you’ll need a minimum score of 650) you may be able to get a significantly lower rate through a private lender. Here’s an example: The 2022-2023 federal student loan interest rate is 4.99% for undergraduate loans. Currently, Earnest’s student loan refinance rates start at 1.74% for a variable interest rate loan, and 2.99 percent for a fixed interest rate loan, with a .25% discount for signing up for autopay2. Here’s what the cost of a $10,000 loan at each of those rates would look like over the span of 10 years:

$10,000 at 1.74% Variable APR (Private) $10,000 at 2.99% Fixed APR (Private) $10,000 at 4.99% Fixed APR (Federal)
$10,902 $11,582 $12,722
Savings over 10 years3
$1,820 $1,140 N/A

The best way to qualify for the lowest interest rate possible is to go into your application with a high credit score. While other factors will also influence your rate, such as your income and job stability, the higher your credit score is, the lower your interest rate is likely to be. You may be able to enlist the help of a cosigner (such as a parent, guardian, older sibling, or other relative) to lower your rate if you don’t qualify on your own.

How to boost your credit score

If you don’t get an interest rate as low as you’d like on your first try, you may be able to get a lower rate by signing on with a cosigner with a higher credit score than you. Or, you can take some time to review your credit history and work on building it.

If you’re young and don’t have much credit history, you can improve your score by continuing to pay your student loans on time, applying for a credit card and making regular, on-time payments, and making sure you keep your credit usage low — under 30 percent of the credit available to you (so, if you have $1,000 of credit, using less than $300 is considered “low” and healthy).

On the other hand, if you have an established credit history but have recently applied for a lot of new credit cards, all that new credit could be dragging down your score as it decreases the average age of each account. Closing some of your newer accounts could potentially increase your score. Finally, you may be able to “boost” your score by connecting accounts you pay with a debit or credit card, such as streaming services, phone bills or wifi.

The biggest advantage of consolidating student loans: Forgiveness and flexible repayment options

While you won’t benefit from lower interest rates under a Direct Consolidation Loan, there are some perks to keeping your loans with the federal government. For starters, anyone with eligibility for the Public Service Loan Forgiveness program (PSLF) will still be eligible after consolidating — though you’ll want to check with your loan servicer directly if you have any questions about your progress toward forgiveness.

Second, you won’t lose out on any of the federal loan benefits4 available to borrowers, such as income-based repayment plans that help you access monthly payments that are easier for you to afford. You’ll also reap the benefits of positive changes to federal loan policies, such as when the government temporarily suspended all student loan payments and interest to relieve borrowers during the COVID pandemic.

Additionally, if for some reason you become unable to pay your loans, you’ll be able to ask for deferment — a period without payments during which interest won’t accrue — or forbearance — a hiatus from payments during which interest does accrue — which can provide temporary relief to prevent you from going into default.

Federal loan borrowers have access to a wide range of repayment plans to suit their specific needs, such as income-based repayment plans that calculate monthly payments based on your individual disposable income. Some of these plans are not available to people who bundle Parent PLUS loans with their other federal Direct loans, so be sure to seek advice from or ask your loan servicer if you’re not sure what you’re eligible for.

Other advantages of refinancing student loans

While refinancing your loans can help you save on interest over the course of your repayment period, savings aren’t the only benefit. Refinancing can also help you change your repayment term, access other perks, and gain more control over your loans.

Change your repayment term

Consolidation allows you an opportunity to extend your repayment term from 10 to 20 years, but that’s it. Refinancing gives you an opportunity to change your repayment term to better suit your financial needs.

For example, if you’re earning more now than you were when you first started paying back your loans, you may want to choose a shorter repayment period so you can pay your loans off faster — which can save you significant money in interest and help you get out of debt sooner.

Similarly, if your situation has changed in the opposite direction and you need lower payments, you can extend your repayment period. While you’ll pay more money in the long run, you’ll end up with lower monthly payments. You can always pay extra on your loans later if your financial situation improves.

Earnest offers borrowers a sliding scale to see how your repayment term will affect your monthly payment, so you can choose what works best for you.

Switch between variable or fixed-rate

Variable APR loans generally offer lower interest rates at the outset of the loan, but may increase or decrease over time. Fixed-rate loans stay exactly the same throughout the loan period no matter how interest rates for new loans fluctuate.

When you refinance your loans, you get the opportunity to choose whether you’d like a fixed or variable rate — and if you refinance through Earnest, you can change your mind later on. Borrowers in good standing can apply to refinance their debt through Earnest to change from a fixed rate to a variable APR loan — or vice versa — once every four months. Just be aware that the process requires a hard credit check.

Refinance all types of loans

Consolidation only allows you to bundle your federal loans together, while refinancing allows you to bundle all federal and private loans into one payment. So, if you’re looking for one single payment and you have both federal and private debt, the only way to bundle all your loans together is through refinancing. There is no private consolidation option.

Release a cosigner

Refinancing your loans also gives you a chance to release a cosigner from your debt. If your parents cosigned your loans, for example, and they no longer want responsibility for your debt in the event you can’t pay, you can refinance without a cosigner to release them from that risk.

Choose your partner in lending

When you consolidate your loans through the federal government, you don’t have any say over who services your loans. Through refinancing, however, you can shop around for a lender who is the right fit for you. Each one offers different advantages and perks and may have different approaches to assessing potential borrowers to help you get better rates if your credit score isn’t very high.

Earnest, for example, lets borrowers in good standing request to skip a payment5 once a year if they need a short break from payments.

Other advantages of consolidating student loans

There are some occasions where keeping your loans with the federal government may be the best option for you. Here’s what you need to know about the benefits of federal loan consolidation.

Keep your credit report in good shape

Virtually everyone with federal loans is eligible for consolidation regardless of your credit score — there’s no credit check to consolidate your loans. Even if you have bad credit or essentially no credit, even if you’ve never had a credit card, you can apply to consolidate your loans. Your interest rate is determined by a weighted average of the interest rates of the loans you’re consolidating — not your credit.

Get a lower monthly payment

When you consolidate your loans, you’ll get a new 10-year loan term3, which means your payments will be lower than they were at the outset of your loan. A longer loan term also means you’ll accrue more interest and pay more over time, but lower payments may be easier for you to make. This option may be worth it to you in the long term if you’re struggling to make meet your minimum due every month.

Make all of your federal loans eligible for forgiveness

Federal Family Education Loans (FFEL) and Perkins Loans aren’t eligible for student loan forgiveness programs on their own. However, if you consolidate those loans with other federal debt that is eligible for forgiveness, all of it together will be eligible for forgiveness if you work in a qualifying public service career.

What student loan consolidation and refinancing both offer

Regardless of whether you consolidate or refinance your loans, there are some benefits you’ll get from both — mainly, ease and simplicity.

One easy payment

If you bundle your federal loans into a Direct Consolidation Loan, you’ll have one simple student loan payment regardless of how many loans you previously had, and how many loan servicers managed them. Remember, though, that only your federal loans can be consolidated. If you have private student loans in addition to federal loans, you’ll still have to pay the private ones separately.

Similarly, if you refinance all of your public and private student loan debt through a private lender, you’ll end up with one single monthly payment at the same interest rate. No more trying to keep track of which loan accrues interest faster or strategizing how to pay down the principle — just set up autopay and you’re good to go.

Autopay discount

All federal loans give you an interest rate reduction of .25% for setting up automatic payments that come straight out of your checking account every month. Most private lenders do as well, including Earnest. As long as you’re enrolled in autopay, you’ll get a .25% rate reduction2 on top of whatever rate you’ve qualified for.

Should I refinance or consolidate my student loans?

Both refinancing and consolidation have distinct benefits and disadvantages. No matter which you choose, it’s important to know that you won’t be able to un-refinance (except for during the three-day “cooling off” period), and you can’t un-consolidate your student debt or send your loans back to their original servicers.

Here’s a breakdown that may help you decide between the two.

Refinancing may be ideal for you if…

  • You can get a lower interest rate with a refinance, or you have a cosigner available to you who can help you access lower interest rates
  • You have both federal student loans and loans from one or more private lenders
  • You don’t expect to need protections offered by the federal government such as income-based repayment plans
  • You want control over who’s managing your loans
  • You want a shorter or longer loan term

Consolidation may be ideal for you if…

  • You’re eligible for student loan forgiveness, or think you might be someday
  • You can’t get a lower interest rate by refinancing
  • You expect to want to use the federal government’s income-based repayment plans
  • You don’t want to give up the protections the federal government offers to borrowers
  • You only have federal education loans, or you’re not ready to refinance your private loans

See how much you could save with Earnest

Federal student loan consolidation can help simplify the student loan repayment process by bundling all your federal loans into one simple payment. But it’s not the whole picture — even if you only have federal loans, student loan refinancing may help you save money and pay off your full loan amount faster.

It takes about two minutes to check your interest rate with Earnest and see how much a student loan refinance could save you — and it won’t hurt your credit score. Try out the calculator today to see how refinancing could help you meet your personal finance goals.


Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

2 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

3 Earnest’s Loan Cost Examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $49.37) and a 1.74% APR would result in a total estimated payment amount of $11,847.89. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $65.94) and a 4.99% APR would result in a total estimated payment amount of $15,825.68. Your actual repayment terms may vary.

4 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

5 Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Your debt is from paying for education at a Title IV accredited school. The debt is from your education or your child’s. The debt you’re refinancing is for a completed degree or one that will be completed at the end of this semester. You are currently the primary borrower on the student loans you would like to refinance, and you will remain the primary borrower after refinancing. You must reside in the District of Columbia or one of the 48 states Earnest Operations LLC is authorized to lend in (all but Kentucky and Nevada). This is strictly a student loan refinance product. There is no opportunity to borrow more than your outstanding qualifying student loan amount. You must be the age of majority in your state or older at the time you apply, as well as be a United States citizen or Permanent Resident Alien without conditions. Refinancing is subject to credit qualifications. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.

Earnest Loans are made by Earnest Operations LLC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit for a full list of licensed states. For California residents: Loans will be arranged or made pursuant to a California Financing Law License.

Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.